Most people, I believe, are familiar with the "mystery shopper" idea. Simply, you send a person into an establishment with the intent to learn about the quality of the service, the knowledge of the sales person, and the overall shopping experience. The person isn't cloaked in a trench coat sporting a fake mustache and a hoaky accent. Instead, the mystery shopper is intended to represent the average consumer.
You may have wondered how the concept would turn out in seeking investment advice, or possibly not. Anyway, the approach has been used and the results presented in a National Bureau of Economic Research paper by Mullainathan, Noeth, and Schoar entitled "The Market for Financial Advice: An Audit Study" and described by Steve Vernon.
The study used the mystery shopper approach on advisors who are compensated by commissions. Not surprisingly, it found that many advisors encouraged mystery shoppers (less glamorously labeled "auditors" in the study) to use higher-priced actively managed funds. Advisors recommended actions supporting active trading or so-called "churning." Even auditors who showed up for advice with well-diversified portfolios of low-cost index funds were encouraged to go the higher priced active route.
One interesting finding was that approximately one-third of the advisors wouldn't give specific indications how the auditor's funds would be invested. The authors observed that, although understandable, it creates a difficulty in being able to screen advisors in determining which to choose.
Of all the results, the one that most interested me was the finding that most of the auditors would return to the advisors with their own money. This indicates an obvious need for education. Without getting into the whole active versus passive debate, it is clear that consumers at least need to be aware of the existence of an alternative approach. They need to know there is considerable evidence that has found that low-cost diversified fund investing is the best approach for people for creating retirement wealth.
Apparently, the auditors weren't knowledgeable on this point and fell under the sway of a smooth sales pitch.
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